UV Letters

Higher Education: Hero or Villain of Economic Growth?

Volume V, #20

Few things are more upsetting than when a hero turns out to be a villain. Growing up in Canada, we were used to winning all kinds of medals in the Winter Olympics but forever coming up dry in the Summer Games. Canada set a dubious record at the 1976 Montreal Olympics when it became the only host country to fail to win a gold medal. So ahead of the 1988 Games in Seoul, when quiet Ben Johnson emerged as Canada’s answer to America’s brash and flashy sprinter Carl Lewis, all of Canada put Johnson on a pedestal. And when he crossed the line first in Seoul in a record 9.79 seconds – the announcer’s booming “9 7 9” reverberates in my head to this day – the entire country went berserk with joy. Three days later, Canadians received breaking (and heartbreaking) news: our hero had tested positive for steroids and was disqualified. I walked around in a cloud for at least a month. Toronto’s tabloid newspaper,
The Sun, summed up the mood with its cover on September 26, 1988.

More than two decades later, Americans had similar empty feelings when Lance Armstrong, cancer survivor and Livestrong Foundation founder, turned out to be a cheat, and when Bill Cosby, model dad, turned out to be a predator. I’m currently struggling with my own disappointment concerning Donald Trump. While far from a hero, I did think Trump was a harmless idiot. Now I see I may have been wrong about the harmless part.

***

America’s colleges and universities are viewed as economic
engines of innovation. But while our research universities continue to spin out amazing scientific research and technological advances, annual economic growth has declined from the 3-4% range prior to the recession, to well under 3%. If colleges and universities took some credit for economic growth prior to 2007, could they be responsible for the recent slowdown? Could America’s heroes of economic growth turn out to be villains?

Consider the following:

New college graduates who avail themselves of federal financial aid now average over $30k in student loan debt. Millions more incur tens of thousands of dollars in debt without completing a recognized credential. Total student loan debt is $1.2 trillion, the second highest form of debt (behind mortgages).
Student loan debtors are so unhappy that 30% would sell an organ to be rid of their loans.

The Federal Reserve Bank of Philadelphia published a
report showing that student loan debt is negatively correlated to net creation of small businesses; between 2000 and 2010, a one-standard deviation increase in student loan debt in a zip code led to a 25% reduction in the number of small businesses (which create 60% of all new jobs).

As with Ben Johnson, Lance Armstrong, Bill Cosby and Donald Trump, I may have been wrong about this. While college graduate indebtedness may not be catastrophic at the level of the individual, it may be at the level of the economy.

To be fair, I have previously taken on the topic of
college affordability
and my book, College Disrupted,
has a chapter on the Crisis of Affordability. But even if their reason is off-the-mark, the Democratic candidates for president are onto something with their laser-like focus on student loan debt. Could annual economic growth bounce back to the 3-4% range if the entrepreneurial energies of young adults weren’t weighed down by dollars borrowed to pay college and university tuition?

Recently, Lumina Foundation started a conversation on affordability by proposing a benchmark: the
“rule of 10.” Net college tuition should be limited to what families can afford to pay by saving 10% of household discretionary income over 10 years plus what students can contribute by working 10 hours per week while attending school.

My best guess is that we don’t get to Lumina’s benchmark through Hillary Clinton’s New College Compact or Bernie Sanders’ free tuition plan, although income-based loan repayment (IBR) is likely to play an important role in lightening the load and releasing entrepreneurial spirits. Just last week a GAO report concluded that the U.S. Department of Education
has not done enough to make students aware of IBR options.
More than half of all borrowers are eligible for IBR, while fewer than one in seven borrowers take advantage of current IBR programs.

But what really gives me hope that the economic villainy of our colleges and universities is a temporary phenomenon is that both employers and students are starting to indicate a preference for shorter, stackable credentials that convey demonstrable competencies, and that happen to be much less expensive than degree programs. As the popularity of these
“just-in-time” programs grows, falling enrollment in expensive degree programs will give colleges and universities no choice but to be heroes, help restore our historic rate of economic growth, and provide some insurance in the unfortunate event our next President is named Trump.

Thanks to Allison Williams for her research assistance with this Letter.

University Ventures (UV) is the premier investment firm focused exclusively on the global higher education sector. UV pursues a differentiated strategy of 'innovation from within'. By partnering with top-tier universities and colleges, and then strategically directing private capital to develop programs of exceptional quality that address major economic and social needs, UV is setting new standards for student outcomes and advancing the development of the next generation of colleges and universities on a global scale.

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Three articles that tell us where the puck is going in higher education